Question

Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 76,700 units of product: Net sales $1,518,660; total costs and expenses $1,744,400; and net loss $225,740. Costs and expenses consisted of the following.

		Total		Variable		Fixed
Cost of goods sold		$1,200,800		$776,900		$423,900
Selling expenses		419,900		78,600		341,300
Administrative expenses		123,700		43,700		80,000
		$1,744,400		$899,200		$845,200

Management is considering the following independent alternatives for 2014.

1.		Increase unit selling price 22% with no change in costs and expenses.
2.		Change the compensation of salespersons from fixed annual salaries totaling $201,600 to total salaries of $44,300 plus a 5% commission on net sales.
3.		Purchase new high-tech factory machinery that will change the proportion between variable and fixed cost of goods sold to 50:50. (a) Compute the break-even point in dollars for 2014. break even point: (a) Compute the break-even point in dollars for 2014. Increase selling price: Change compensation: Purchase machinery

Answer 1

Solution a: (Increase unit selling price by 22%)

Current Selling price = Total sales / Sales units = $1,518,660 / 76,700 = $19.80

Increased selling price = $19.80 + ($19.80*22%) = $24.156

Total Sale at increased selling price = 76,700*$24.156 = $1,852,765.20

Contribution margin ratio= (Total Sales - Variabe costs) / Total Sales = ($1,852,765.20 - $899,200) / $1,852,765.20 = 51.46713%

Break even point in dollars = f(ixed costs / Contribution margin ratio = $845,200 / 51.46713% = $1,642,212.9782 or say $1,642,213 (rounded)

Solution 2: (Change the compansation of salesperson)

Variable costs = Current variable cost + Net sales * 5% commission = $899200 + ($1518660*5%) = $975,133

Contribution Margin ratio = (Sales - variable costs) / sales = ($1518660 - $975133) / $1518660 = 35.78991%

Fixed Costs = Current fixed costs - reduction in fixed annual salaries of salesperson

= $845,200 - ($201,600-$44,300) = $687,900

Break even point in dollars = Fixed costs / contribution margin ratio = $687,900 / 35.78991% = $1,922,050.2643 or say $1,922,050 (rounded)

Solution 3: (Purchase new Machinery)

Variable cost of goods sold = $1200,800 *50% = $600,400

Fixed Cost of goods sold = 1200,800*50% = $600,400

Total Variable costs = $600,400+ $78600 + $43700 = $722,700

Total Fixed Costs = $600400 +$341300 + $80000 = $1,021,700

Contribution Margin Ratio = ($1518660 - $722700) / $1518660 = 52.41199%

Breakeven point in dollars = $1021700 / 52.41199% = $1,949,362.9353 or say $1,949,363 (rounded)